Welcome back to another mini-season of Confident Money! In the next few episodes I’ll be talking with Kyle Seagraves, Certified Mortgage Advisor, Licensed Loan Originator, and full-time home loan educator.

In this episode, we’ll cover:

• What credit scores are and what they mean
• The difference between a soft pull and a hard pull
• Different types of loans
• What credit score numbers to aim for
• What kinds of credit you should have when applying for a mortgage
• How much credit history you need

Connect with Kyle:

On YouTube: https://www.youtube.com/c/WinTheHouseYouLove

Online: https://www.winthehouseyoulove.com/

We cover ALL of this in the “Get Your Finance Sh*t Together” self-study course at confidentmoneypodcast.com!

Now Open: Money Mavens group coaching program! There’s a special prize for anyone who signs up in the first week at confidentmoneypodcast.com.

Enter to win a free strategy session with me!  Leave a 5-star review and include your IG handle to enter. We draw the winner at the beginning of each month. 

FTC/Affiliate Disclaimer: By using some of these links, at no extra cost to you, I may earn a small commission or referral fee, which helps me continue to produce content like this, support my business, and my team.

DISCLAIMER: I am not a financial advisor and this is not financial advice. My podcast is for educational purposes and is my personal opinion only. To make the best financial decision for your situation, please do your own research and if needed, seek the advice of a fee-based, fiduciary.

Music credit: Neon Fairies by Wolves 

A Podcast Launch Bestie production

Hey, welcome back to the confident money podcast.

My name is Caitlin Magnuson and I'm your host.

We are going to be doing a mini season with Kyle Seagraves Kyle Graves, as a

certified mortgage advisor, licensed loan originator, and the owner of when the

house you love a YouTube channel with over a hundred thousand subscribers.

And I couldn't be more excited to have him here helping you all understand

the ins and outs of the mortgage industry as it is now and home buying.

So Kyle welcome.

And Katelyn, I am excited to go through this series because so much

of home buying

I think is maybe not intentionally confusing on purpose, but it can be

really confusing and overwhelming.

And it's nice to break things down into kind of different sections or step-by-step

through the process to help people feel more confident as they work through it.

Absolutely.

I couldn't agree more and having bought a house right after the last recession.

I know that things have changed a lot in that time because I then

purchased again in 2019 and it was a very different ball game.

And I think it's really different even now, just a couple of years later.

So.

Very excited.

We're going to be talking in this episode about credit and the ins and

outs of what you kind of need to know.

What credit scores are, what the ranges are, scoring models,

soft pulls, and hard poles.

So, Kyle, I'm going to just let you take the stage here.

Let's dive face first into credit, which I know.

A lot of our listeners are probably like, oh God, I don't even know.

And like, what if the models aren't accurate?

What if I'm not looking at the right information?

What do I do?

So let's start with what credit scores are and how to go about finding.

Yeah.

So a credit score, first of all, is just, a model and there's

several different types of models.

Just this algorithm that takes into account your financial history

based on when people give you debt.

So things like a credit card or a car loan or a student loans,

different things like that.

And so there are three different credit scores that every single person has

a, you have one with Experian, one with Equifax and one with TransUnion.

So three different credit bureaus as they're called.

And there's different types of scoring models that lenders will use

before they approve you for a loan.

So for instance, a car dealership is going to look at one type of model.

a mortgage lender is gonna look at another type.

A credit card company is going to look at another type and unfortunately

it's complex and confusing, and I wish it was more simple.

But.

Ultimately, you don't have to be a credit master to get approved for a loan.

That's going to save you more money in interest.

All we need to do is keep a couple things in mind to make sure that,

our credit is on track to buy a home.

And if it's off track, there's a couple of things we can do to get a

little bit back on the right track.

Really the first thing that you want to do is begin getting a good idea of where

you're at with your credit, to begin with.

And so this is where people commonly will go to something like, uh, credit

karma or credit Sesame, and they'll see their score online for free.

Um, and usually they're only going to show you one score, often

it's Experian, and it's used with what's called a vantage score.

So there's two big scoring models.

There's a vantage and there's Franco.

Vantage is commonly used in the auto world.

FICO is what's used in the mortgage world now inside of each of those.

So there's several different vantage scores, several different FICO's and

ultimately you don't have to know them.

You don't have to understand what score is being used.

But it's helpful to understand first that there is a

difference between these models.

And so what you see on something like credit karma is going to be

different than what a mortgage lender might see with your credit score

and these different scoring models.

Just look at things a little bit.

For instance, FICO might look at your payment history

differently than vantage score.

My vantage score might look at your average age of credit

history, uh, than FICO might.

So when we're looking at these sites that have your credit score like credit

karma or anything, that's available online for free, you're going to be

getting what's called a soft poll credit.

No softball means that this will not impact your credit score at all.

So you can log on, look at your score for free, um, and have zero

impact to your credit at all.

It will not create an inquiry, meaning someone checked your credit

score that will not happen when you apply for something like an auto loan

or a credit card or a mortgage you get what's called a hard inquiry.

And this is where a lender looks at your full credit profile.

Uh, and it actually puts on a little inquiry onto your.

Credit report.

Now inquiries only impact 10% of your credit score.

So it's not the end of the world.

This guy is not going to fall just because you got an inquiry

put on your credit report.

Even though I think a lot of people teach that for some reason.

Like if you get an inquiry, it's the worst thing in the world.

It really is not.

But, um, those are the.

Really the big things that we need to know about credit as we're going

through this process, you don't have to understand the models and the intricacies.

We don't have to try to game the system.

you can go really deep into credit and figure out how these algorithms

work and try to game them to get higher and higher and higher.

But ultimately when, when we're going from, just trying to.

Optimize your credit to buy a house.

You don't have to understand the deep complexity of credit.

If you're wanting to go from like a seven 20 credit score to like an eight

20 credit score, then maybe we need to get in the weeds a little bit more

about like, how did the strategies work?

But if we're just trying to say, we think we're in the mid six

hundreds, but we want to buy a home.

We don't really need to understand the intricacies here.

So the confusing part for a lot of people though, is.

When they log on to credit karma, they see their soft, poll credit

score and they only see one, but then they talk to a lender and that credit

score likely is going to be different than what they saw on credit karma.

And often it usually ends up being around 20 points, lower than a mortgage

lender will see your credit score than what they see on credit karma.

And so what we can use credit karma for is, or any softball

site, is tracking the momentum.

Of the credit score.

We don't actually care about the number specifically, whether it's a six 20 or

6 34, whatever that number exactly is.

We just want to see are the habits that we're doing with paying back

debt and spending money increasing the credit score or lowering it.

because we won't obviously want that to continue increasing

if that's, uh, where we.

Now for anyone here, that's listening tile.

What's the whole reason for them to be increasing or

improving their credit score?

You know, what's the impact to them when it comes to their mortgage.

Yeah, the first thing is, being eligible to get a loan.

So all different loans have different minimum credit scores just to be eligible.

And then after we're eligible for.

Uh, the higher, the credit score that we have, the easier it is to get approved and

the better terms that we're going to get.

So somebody with a six 20 credit score is going to get a higher

interest rate on their loan than somebody with a seven 20 credit score.

Now that adds up to thousands, possibly tens of thousands of dollars

over the lifetime of a mortgage.

So just making small changes even over the next six months to increase their

credit score could literally save you tens of thousands of dollars just in India.

So with the eligibility side of seeing, how do we qualify for a loan?

Um, there are four main types of loans that we're going to cover that in a

future episode, some little more in detail of these types of loans, but we have

conventional loans, FHA, VA, and USDA.

So the minimum for conventional loan, this is the standard.

What most people get, uh, and gives the best term.

It's a six 20 credit score.

So we need to be above the six 20, ideally with a conventional loan.

You want to be above a six 80 to get better interest rates, but six 20 will

allow you to be eligible for that loan.

Something like FHA, the minimum is actually all the way down to a 500 credit

score, but you would have to put 10% down,

which is usually a bit of a

struggle.

if you have a five 80 credit score, you can do three and a half.

VA and USDA also very similar.

They allowed down to a 500 credit score with 0% down.

Now obviously 500 credit score, in that range of below 600, that loan is

very difficult to do, and it's difficult to find lenders that will do that.

So a really good target, I think for most.

Is, uh, 6 46, 40 and above is going to allow you to be eligible for

pretty much all those four loans.

And there's a couple outside of those four that, get a little bit more nuanced,

but six 40 and above will allow you to qualify for the four main types of loans.

Then we'll start giving you better terms.

Obviously the higher, the credit score, the better, One of the things

that I think people can get stopped up with is they won't move forward

with buying a house because they might be at that six 40 range.

And they're like, well, we want to actually wait a few months to

raise our credit score to seven 20 or whatever, to then buy a house.

The problem with that though, especially in a market like this is when homes are.

So quickly, right over past 30 years, 4% is the average appreciation.

Over the past three years, we've been seeing close to 20 to 30%

appreciation on homes when that's happening, missing out on buying a home.

Forces you to lose out on that potential appreciation.

So even though you could have saved more interest in the future, you

did miss out on some appreciation.

So I think six 40 is a really good target to then say, great.

Now we want to go ahead and apply with a lender and see what our

options are to then begin, decide if we want to move forward with that.

okay.

No, that makes total sense.

And if someone is looking.

To move forward and let's say they've been checking, you know, I know that Wells

Fargo provides me with a credit monitoring option that can kind of show me where

I'm fluctuating and what it looks like.

So in what you just explained, if they're generally generally looking at around

20 points lower, when there's a hard poll, are we actually wanting them?

If they're tracking their score and looking at that soft pool, are they

wanting to be closer to six 60, give or take to then be in the 6 46.

Yeah.

I think that that's a perfect way to look at it.

And really it's, it's hard.

I wish credit was a lot simpler where we could actually see that score.

and it, it wasn't as you know, these different models and such, because,

you know, for example, like my credit score is in the seven hundreds and

I, I just applied for a mortgage.

but when I look on softball sites, it sits at like six 80.

When I know my credit score is like mid seven hundreds.

So it has actually the opposite

in

is as well.

I was surprised that you said that it's normally lower because mine

has always been lower on the soft pools and higher on the hard poles,

which is a pleasant surprise.

Right?

it is a pleasant surprise.

And so you know that at minimum, if we on the softball side, it's where we want it.

Ideally, it's going to be that way for the mortgage side.

And that's why I think the soft pull side, those free sites are really

great at checking the momentum rather than the score itself.

There's only one place that you can get your credit score, uh,

that shows you exactly what the.

What Paul and that's on my fico.com because that's actually the FICO

company that creates the scoring models, to be able to do that.

But ultimately, like, don't feel like you're in the dark with this,

and it has to be a guessing game.

You can apply with a mortgage lender for free, go through the pre-approval process,

or even just talk to somebody and say, I'm interested in what my credit is.

could you pull it?

It happens.

You will get an inquiry on your score, but an inquiry, most people don't realize only

changes their score zero to five points.

So worst case scenario, it would drop at five points and you actually have

45 days to shop for lenders after that.

So if you're at the point where you're like, I'm close, but I'm on the line.

I'm not sure.

Go ahead and talk with a mortgage lender and have them see what your actual

score would be that they would use.

Um, because.

The cost of doing that is so low compared to waiting longer and longer, just

because you aren't sure how your soft score will relate to your heart score.

Right.

And I think the more knowledge you can have here, definitely the more power that

you have to make empowered decisions.

And with that, I know that a lot of the clients that I chat with and a

lot of the listeners here have raised concerns that, you know, maybe they're

following Dave Ramsey, or maybe they've just had that drilled into their head

because we're millennials and we love avocado toast and how dare we be buying

lattes, but that we shouldn't have debt.

You know, debt is horrible.

Debt is a bad thing with the exception sometimes.

Home loans or mortgages.

But with that, I know a lot of people that I chat with are concerned that they have

to have all of their student loans paid off all of their credit card debt gone,

you know, all of their car loans paid off.

So when it comes to, you know, looking to apply for a mortgage or qualify, do they

need to be debt free when they're coming in and you know, how has that factor.

Yeah.

So I think with any financial decision, one of the best places to

start is internally, because there's so much emotionally packed into the

decisions we're making about finance, because they're usually not legit.

And based on numbers, they're actually built on a lot of shame.

So a lot of people have shamed us into making should

statements about our finances.

So anytime you start with evaluating, what should I do next with my finances?

And it starts with, I should be doing this.

Let's take just like maybe a day or two to see where, where did I hear that?

Is this rooted in the level of shame coming in?

Because things like I should be debt free before I buy a house.

Isn't really based on a lot of logic or financial data.

It's based on a lot of shame around, oh, I shouldn't have debt.

Okay.

The should, let me figure out where did the should come from?

is that actually true?

So you absolutely can qualify for a loan and be really successful financially

with student loans, with auto loans, with a mortgage and with credit.

Absolutely possible and possible to be financially successful with those as well.

Now, then it comes down to a matter of preference.

Are these the things that I want, that's a different conversation.

You can have a preference of saying, I don't want to have

this type of debt for me.

I think, what is best is the only debt that I am hesitant about people

having before they buy a house is if they have a credit card with

a large balance that they can't.

If you have a credit card, that's sitting probably close to like 20 to 25% interest.

Even if it's a 10, 15, these are really high interest payments.

And it's not a credit card that you're using for points and paying off cyclical.

If you're, if it's like continuing to grow to me, it's not only is

the cost of that credit card.

It can be significant and we could use money to pay that down, but

it also can be an indication of maybe, uh, where we're at financial.

Um, we're not ready to take on all the other costs of buying house.

So that's the only instance in which I would say if you have credit card

debt that keeps accumulating, maybe we'll look at addressing that before we

then start to look at buying a house.

Right.

Which makes total sense because that can speak to the general financial

situation, not the credit card debt itself being bad, but the reason behind why.

Increasing or credit card debt.

That's just sitting there stagnant, not getting paid off, which makes complete

sense because it shows that maybe you're not making enough or maybe you have

money going out in other directions, or you're just not quite comfortable

financially with where you are right now.

I'm a really big proponent.

I bought our current house with a car loan, no student loans, but a

car loan, some credit card debt.

And.

I don't regret it.

Like that's just a

tool for me.

Right.

Absolutely.

Yeah, it's the same for me.

I have student loans.

I have an auto loan.

Uh, I have credit card debt that I pay off every single month, but it

doesn't continue to sit there and grow.

And I think too, with buying a house, you're responsible

for the cost of that as well.

So if something happens with your furnace, even just the general cost of moving into

a home, uh, if you're looking at know changing locks and handles and fixtures

and paint and everything else that goes with it, you don't want to start

putting all those expenses on a credit.

If you're already using a credit card to pay for just the general cost of life.

Uh, it's just going to continue to grow that problem.

If I have to pay interest on all the things that I'm

doing with buying this house.

Right.

No, I, I couldn't agree more so, and I really loved your point

that you brought about the sheds.

I think sitting and taking a second to really assess, you know, we have all

those limiting beliefs or all those ingrained beliefs that will pop up,

you know, from family, from the media, from people we followed from anything.

What do you actually want?

Because if something's not actually bothering you or actually hindering

you, and it's just you feeling this shame or this guilt or this lack

around, well, I shouldn't be doing that.

I should be, you know, the, yeah.

But what do you actually want?

What matters to you?

What's important to you?

And

if the, you know, if you're in a spot, I think that so many people,

when I bought my first house, I was shocked at how quickly I could buy.

I was a 19 year old kid.

You know, a bunch of jobs and like had to pull alternative.

Actually, I want to talk about that.

I had to pull alternative credit sources because I was 19.

And I had like two years of credit history.

I don't know how much experience you have with this Kyle, but for anyone

that's younger, that's listening or maybe they've been debt free for

years and they don't have established credit cards or they don't have,

you know, a lot of credit history.

What options are there for people that need alternative sources

of credit to prove credit?

Yeah.

So on a conventional loan, the ideal, and we can get into this more when

we talk about, uh, you know, the different loan types, but the ideal is

to have a two year history of credit.

Um, I've done quite a few loans for people where they are 18, 19, and they, you know,

they just recently got a credit card or maybe they only have a couple, uh, they

have one credit card and that's about it.

It'll look at it and be like, okay, this is what we would call thin credit.

FHA loans are going to be a lot more lenient on things like that.

whereas conventional loans usually want a two year history and usually it works

best if you have two to three different types of accounts, so maybe a couple of

credit cards, um, and then maybe you have your rent reported on your credit report,

um, which is really helpful to do so.

In those instances, with somebody who has a thin credit profile,

there's a couple different options.

One is you can look at something like an FHA loan, FHA loans are

usually more expensive long-term so it's not my first option.

You could look at adding a co-borrower.

So somebody with more credit history that could be added on the loan to

help support the fact that, uh, you know, there's a backup plan if needed.

Another thing is what are called trade lines or alternative credit,

like you mentioned, and what these are is, uh, things that aren't reported

on your credit report, but they do.

That you can pay stuff on time.

So these are things like utility bills, um, your rental

history, uh, insurance payments.

If you can prove that those have been paid over something like 12 months on

time, then those can be added into your credit profile as an additional tradeline.

It's just not reported on your credit report.

The only issue here is that when we do that, we get into what's called

manual underwriting, and usually you have a higher interest rate.

That's going to be.

On that because it's more risky.

most loans, the way that they are given an approval is actually

through a computer software, a loan officer's going to take your whole

application, put it into a software.

It's going to do all of its thousands of different data

points on is this risky or not?

And it's all based on stuff that nobody knows about.

Like nobody's told what are all the little data points of

what works and what doesn't.

So it's going to come back and say like the thumbs up, thumbs down.

If it's thumbs down, you can do a manual.

Where a human is going to take a deeper look at us and see, can we check off all

the boxes that this is going to be less risky for us, but there's still a level of

risk because the economy on the secondary market really likes when the computer

software gives a thumbs up because it checks so many different things.

Uh, so when the loan is more risky, because we have to use things like

these additional trade lines, We're kind of veering off the path of a

more traditionally approved mortgage user going to pay a higher interest

rate because that loan is more risky.

So it's something to be mindful of.

I think being debt free is great, but you can also have an incredible credit

score without paying a diamond interest.

Like, uh, so I don't understand why we would try to throw away a credit score

when it actually will cost us more money on something like a mortgage.

It's very easy to have a credit.

Just assign it to gas and one credit card assigned to groceries, and I pay

those off every month and it can help you maintain a 700 plus credit score

without paying a single diamond interest.

Absolutely.

I couldn't agree more.

Yeah.

I was that exact scenario that you described when I went to go look at

buying and I was 19, I had no auto loan.

I had no student loans.

I had one credit card that I think I might've had for like

a year, a year and a half.

And they were like, we don't know.

and it was great.

I mean, I ended up the loan officer that I'd worked with at the time.

And, uh, we can chat about this in a later one, but, um, had mentioned

that like, most people are looking to either buy or refinance within

the first three to five years.

So by that time, if I was looking to do that, I would have a much

more established credit history.

I was really happy with it.

It was barely more than rent, but again, this was 2010.

It was a very different market and it was kind of a lovely, it's a lovely

time to be building equity in a house.

So any other kind of wisdom or parting thoughts on credit?

Because I feel like this was a very thorough episode.

Most people, I think, think that they have to have high credit

scores, you know, 7 27, 40 plus.

And I think that that's kind of debunked.

Some of that, that you can get started sooner, even if it's a little bit

more expensive interest rate wise, or even if you haven't finished

paying your debt off because you can potentially be getting a home and

capturing some of that appreciation rather than waiting until late.

Yeah, absolutely.

You can get.

Wait earlier.

I think that a lot of people realize you do not have to have perfect

credit, because for a lot of people, and this has been true of a lot of my

clients is I've worked with clients.

I'm a, down to a five 14 credit score to mid six hundreds and they wanted

to wait and they were so glad that they actually move forward, buying a

house, build up their credit score, qualified for even cheaper loan because

the house value went up so much.

The one last thing I would say, and this isn't directly related

to credit, but happens, I think.

Around these credit conversations that, uh, and just money in general, especially

kind of going with like the sheds and the shame is that what I've realized

has been helpful, I've kinda made the switch recently is I stopped talking

about money with people like, especially kind of being in the entrepreneur.

I have a lot of entrepreneur friends, and it's amazing how battlefield after

a phone call with a friend of mine and we're, you know, we're talking about

numbers and stuff, but it's like, no matter what happens, there's a level

of that shame that kind of kicks in.

And ultimately it's usually not helpful to have these conversations about

exactly where you're at with somebody who's like friends or family, because

it often can come with bad advice.

Um, or it can introduce these elements of like shame or you should

be doing this or, or whatever.

I think we can talk around the concepts of money without

talking about our own financial situation and what I found for me.

And I think for a lot of people, is that when we stop oversharing, I think some

of the finance stuff with people who may not be experienced enough to be able to

help us actually walk through something, uh, it can help give you a lot more.

So save those conversations for people who actually have valuable things to say

and have a track record of that before we expose ourselves to, uh, hearing

the advice that maybe isn't super solid

season-3-win-the-house-you-love_recording-1_2022-06-02--t06-49-00pm--guest617609--kyle-seagraves: from

them.

I could not agree more.

And that's something that I've implemented in my life a lot where I'm going to pay an

expert or talk with an expert in the area that I'm looking to make a decision in.

If I feel the need to, I'm not educated.

And then I will form my own opinions.

My own decisions decide what's right for me.

And then maybe notify the people around me or, you know, if that needs to be done.

But I think that so often we look for external validation and thoughts that

it can muddy our internal mental waters.

Yeah, yeah,

Well, Kyle, thank you.

Next episode.

We're gonna be talking all about different types of loans and

diving really deep into those.